CEO (to the CPO): “You said the other day that we could further reduce costs with better contract management - what do you figure we could save?”
The CPO outlines the current position and targeted savings they are working towards:
- $1.7M savings by increasing on-contract buying from 65% to 85% (20 percentage points) by making them fully visible to all buyers at purchase time
- $400,000 savings by using improved contract visibility to consolidate duplicate contracts and gain higher volume discounts
- $200,000 savings by preventing incorrect prices on POs (e.g. failure to use quantity price breaks)
That’s over $2.3M in annual savings.
“Based on a review of current contract activity we've done together, we’ve identified additional ways we can save as well…”
“Here’s our estimate of avoidable expenses we could achieve …”
- $250,000 approximate savings by avoiding automatic renewal of contracts without re-negotiation, and in some cases, contracts we don’t even want to continue (e.g. maintenance agreements)
- $50,000 approximate savings from reduced manpower required to handle contracts (e.g. manual authoring, filing, creating time-based payments, monitoring for review, etc.)
That’s another $300,000 savings a year from better, more efficient management of contracts within Procurement.
“So let’s recap what you’ve told me…”
CPO & CFO:
“Here’s the summary:”
- $2.3M through increased on-contract buying and better compliance with contract terms
- $300,000 through avoidance of unwanted automatic contract renewals and elimination of non value-added manual contract administrative manpower – 1 FTE.
That’s a total of about $2.6M a year.
“That’s savings that would go directly to our bottom line. I like that idea, but why can’t we get more people using our negotiated contracts today? And why can’t we keep better track of them today?”
- “Who knows what suppliers we have discounts with – I can’t keep up with memos and e-mails saying I should by from this supplier or that.”
- “I don’t have time to look up the details of supplier contracts when I need something fast – I usually just put in the list price and assume the supplier will discount it properly.”
- “It’s a shame that maintenance agreement got extended – we don’t even use that equipment anymore.”
Procurement people say:
- “Contracts are filed all around the company – no one really knows what all contracts we have.
- “Many contracts are still only on paper and not at all visible in our e-procurement system.”
- “There is no standard for what information we have across contracts, or how we categorise them – it’s impossible to do any kind of automated analysis.”
- “We try to keep up with contract expiration dates, periodic payments, purchase activity compliance, and all those things; but even though we spend a lot of time trying, we still miss a lot of things.”
“That’s all more complicated than I realised. What capabilities would we need to get the savings you outlined?”
The CPO and CFO combine their respective notes to make a list on the whiteboard:
- A single, centralised electronic contract repository where all contracts are stored
- Standard information templates for each type of agreement (e.g. simple, framework, call-off, blanket, price lists, etc.)
- Integration of contracts directly into e-procurement for buyer visibility, automatic terms compliance, and capture of purchase activity
- Automated monitoring of scheduled events and expiration dates with e-mail alerts to the appropriate people
- Automatic generation of scheduled payments for authorisation
- Performance analysis reports and KPIs
“There are other benefits we could achieve with automated contract management as well…”
In addition to the $2.6M annual savings and cost avoidance we can clearly identify today:
- A consolidated view of our commitments and liabilities
- Reduced risk of lapses in contract coverage (e.g. insurance or warranties)
- Better information for spend analysis
- More time available to procurement professionals to negotiate more contracts that generate more savings